First Trust launches Dow Jones internet ETF in Europe

Jun 21st, 2018 | By | Category: Equities

First Trust Global Portfolios has launched the First Trust Dow Jones Internet UCITS ETF (FDN LN) on London Stock Exchange, providing pure-play access to the thematic growth story of US-listed internet firms.

Derek Fulton, CEO of First Trust Global Portfolios

Derek Fulton, CEO of First Trust Global Portfolios.

Derek Fulton, CEO at First Trust Global Portfolios, said, “We are continuing to witness exponential global growth in internet usage. This new, highly liquid ETF provides exposure to this burgeoning asset class in a transparent UCITS structure.

“Tracking the Dow Jones Internet Composite Index, FDN offers exposure to FANG as well as driving alpha from other web based companies.”

The index methodology selects the largest and most actively traded stocks of US companies within the required sectors. This includes 15 companies from the internet commerce sector and 25 firms from the internet services sector. Firms must derive at least 50% of their revenue from internet commerce (or services) to be categorized as belonging to that sector.

To be included in the index, a stock must have a minimum of three months’ trading history. This will not apply for stocks that have been spun off, unless the parent firm has been trading for less than three months. Stocks are also evaluated based on their liquidity with illiquid stocks moved from the pool of eligible securities.

The index is weighted by float-adjusted market capitalization with a single constituent cap of 10%. Additionally, the aggregate weight of constituents with weights of 4.5% or more is restricted to 45%. Reconstitution and rebalancing occurs on a quarterly basis in March, June, September and December.

The fund tracks the index through full physical replication.

While the threshold for inclusion in the index is stocks with market caps greater than $100 million (meaning its scope covers the small, mid, and large-cap universes), its methodology tilts exposure towards the higher end of the market-cap spectrum. The mean market cap of the index is $63.5 billion and the median is $9.0bn, implying that roughly half the constituents belong to the large-cap domain. The smallest constituent has a market cap of $950 million.

The top ten constituents account for just over half (51.7%) of the total exposure. The largest of these are Alphabet (10.0%), Amazon (9.9%), Facebook (8.5%), Netflix (6.4%) and (4.9%).

Internet stocks – most notably the so-called ‘FANG’ stocks (Facebook, Amazon, Netflix and Google (now Alphabet) – have considerably outperformed the broader US equity market over the past one, three, five, and ten-year time horizons. The Dow Jones Internet Composite Index has returned 24.6% per annum with an annualized standard deviation (volatility) of 15.6% over the past five years. The S&P Total Market Index delivered only 12.8% per annum over the same period; however, risk was lower with an annualized standard deviation of 10.0%.

Over the past year, the index has truly outshone, notching up a 42.6% return, as of 31 May 2018. The broad US equity market, by contrast, delivered 15.1% over the same period. This strong performance, however, is reflected in a price-to-earnings ratio of over 50 which may prove perturbing to some investors.

The fund has been listed with two share classes, allowing investors to choose their trading currency between pound sterling (FDN LN) or US dollars (FDNU LN). Income generated within the portfolio is reinvested. It has a total expense ratio (TER) of 0.55%.

Fulton added, “We are pleased to be adding this product to our already robust line up of innovative factor-based ETFs. As internet exposure continues to grow and develop we believe there remains enormous potential upside in this space. Investors seeking exposure to this asset class may be best served by doing so in such a flexible, transparent and liquid UCITS ETF structure that FDN provides.”

First Trust will be hoping that the new ETF emulates the success of its NYSE Arca-listed equivalent, the First Trust Dow Jones Internet Index ETF (FDN US), which has more than $9bn in assets under management and is rated five stars by Morningstar.

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